Joint (ad)ventures in the legal sector

We all know that nothing in life is certain. As the actor, director and philosopher Clint Eastwood once said: “If you want a guarantee, buy a toaster.” He also said he’d tried being reasonable and didn’t like it. They should teach this kind of philosophy in law school.

One thing in life is reasonably certain though. If you’re a law firm worth your salt, at some point you will be approached by another entity (most probably a work introducer) with a whizzy idea to ‘partner’ with you to ‘help you accelerate your growth’.

In commercial speak this means, ‘we’d like to keep feeding you work but we’d also like to share in your profits’. The arrangement may be pitched to you as a joint venture – a win-win no less.

When considering if such an arrangement will make you better off in the short, medium and long term, it is easy to make mistakes. So, to help you avoid the main ones, here are our seven deadly sins.

Sin 1 – Sharing too much, too earlyDon’t even disclose what brand of tea you buy with a potential joint venture partner until you have a watertight confidentiality agreement in place. There are more people fishing in the legal sector than in the North Sea at the moment.

Sin 2 – Letting yourself be railroadedTry parking the proposition that has been put to you and, instead, visualise what a genuine win-win arrangement might look like from your own perspective. There is no harm in responding to a proposal by saying, ‘I’m not sure your idea will work for us but this alternative might work for us both’.

This approach will put you on the front foot and allow you greater control of the agenda. Suggest that your early discussions be put into a memorandum of understanding (effectively a heads of terms). This will win you time to think clearly and reduce the risk of you being railroaded into something you later regret.

Sin 3 – Undervaluing what you’ve already gotJust don’t. Enough said.

Sin 4 – Failing to address regulatory issues up frontRegulation is king. If you intend to share ownership of your law firm with a non-lawyer-owned counterparty, you will need to become an alternative business structure (ABS). Alternatively, you may want to form a separate ABS for the joint venture.

The Solicitors Regulation Authority actively encourages innovation in the sector and is genuinely supportive of innovative structures, but only if you go to them with a well-prepared application. Becoming an ABS has many practical, regulatory and financial consequences and these need to be thought through carefully in advance.

Sin 5 – Not taking independent adviceThis may sound self-serving but taking independent advice is an essential ingredient in an effective due diligence exercise. Money spent with advisers (financial, legal and commercial), who are prepared to offer an honest opinion on the credibility of the proposed joint venture partner and whether the proposed arrangement smells right, will always be money well spent.

It’s hard to spot issues when you are very close to the detail and experienced professionals will have seen many different deals in their time, both good and bad. Potential investors often suggest going to see their advisers together – to save cost. There is a reason why they do this.

Sin 6 – Not running your own financial modelsUnless you have a three-year financial forecast showing the impact of your new joint venture model, you might as well bet your office account on Dusty Carpet in the 3:45 at Aintree (never been beaten, by the way).

Good financial forecasts are ones that you yourself fully understand, show both realistic numbers and worst-case numbers, and contain profit and loss, balance sheet and cashflow data. Never, ever rely on figures supplied by your potential investor. Your own financial models will tell you if the joint venture model will work for you and inform your strategy going forward.

Sin 7 – Not selecting the right structureIt is often said that the opportunity of a lifetime only lasts for the lifetime of the opportunity. Perhaps this is why some people get hurried into bad joint ventures.

Take a step back and think very carefully about the right legal and tax structure for your ABS joint venture. Going 50:50 may be OK on a blind date but only litigators make money when 50:50 joint venture partners fall out.

A key decision will be whether to use a limited liability partnership, a limited partnership, a limited company or create a contractual joint venture. Whatever the choice, a well-drafted governance agreement (partnership agreement, shareholders’ agreement or joint venture agreement) should be clear on how decisions are to be reached and implemented, how disputes are to be resolved, when and how the arrangement can be terminated and what restrictions are going to be imposed on the parties in relation to their wider business activities.

Joint venture structures can become unwieldy if not controlled. Play Alphabetti Spaghetti with share classes if you must, but make sure you properly understand the impact of what you are creating and be prepared to simplify it if you don’t.

I watched the film thriller Se7en (based on the seven deadly sins) from behind a large carton of popcorn and I’ve never seen a joint venture quite that scary. But joint ventures are all about shared vision, commitment and control and, not surprisingly, like many human relationships, finding elements of pride, envy, gluttony, lust, anger, greed and sloth in business relationships is not uncommon.

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